Piping the System by klutzfu50

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									4   Procurement stage


    At a glance
    Background
    Where a significant component of a project is to be provided by external parties, sound
    procurement planning and management is crucial to effective project management.


    Key findings
    The Bendigo and Ballarat pipeline procurement processes were generally well planned
    and managed. Coliban and Central Highlands:
    •    developed procurement strategies to meet the tight timeframes, using the
         information gained from discussions with prospective tenderers and advice from
         consultants
    •    identified and assessed risks associated with the tender and established
         appropriate procurement processes.

    Coliban’s conversion of a standard procurement contract into an alliance agreement
    exposed the agency to higher risk and costs and weakened its bargaining position.
    Consequently, Coliban is likely to have paid more for the contracted works than it
    would have paid, had the alliance agreement been formed as part of a normal alliance
    process.

    Also Coliban did not prepare a specific probity or contract management plan for the
    project.

    Coliban’s and Central Highlands’ probity auditors did not attend all meetings with
    tenderers.

    Central Highlands’ decision to purchase pipe directly from pipe manufacturers and the
    strategy adopted to engage construction contractors, resulted in it accepting the
    project supply risk and a large part of the construction risk. While this decision was
    driven by Central Highlands’ need to complete the pipeline as quickly as possible, it
    exposed the Authority to a higher level of risk than would have been the case had
    another procurement strategy been adopted. To date, this calculated risk has had no
    negative financial or other impacts.



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                     At a glance - continued
                     Key recommendations
                     •     For all major procurements, water authorities should prepare a contract
                           management plan and probity plan. (Recommendation 4.1)

                     •     The Department of Treasury and Finance should incorporate into its investment
                           management guidance materials, clear articulation that public sector agencies
                           should:
                           • only enter into alliance procurement arrangements after assessing the
                               appropriateness of these arrangements for the particular procurement
                               exercise and assessing the suitability of an alliance partner, using the
                               Department of Treasury and Finance’s alliancing guidelines
                           • not tender for lump-sum contracts and then change the arrangements to
                               alliance contracts. (Recommendation 4.2)

                     •     For major procurements water authorities should expand the role of the probity
                           auditor so all meetings and communications with tenderers are monitored.
                           (Recommendation 4.3)




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4.1   Bendigo
4.1.1 Selecting the procurement method
      In developing its procurement strategy, Coliban considered a number of alternatives
      including:
      •     a public private partnership (PPP)
      •     a design and construct contract
      •     an alliance agreement
      •     use of separate contracts for project design, construction and materials supply.

      Coliban recognised that, while greater levels of risk transfer would be possible with a
      PPP approach, and, to a lesser extent, with a design and construct contract or alliance,
      the lengthy establishment time for these approaches would mean that its scheduled
      timeframes could not be met. Specifically, an alliance model was rejected at that time
      because this option would not have allowed the project to be finished by the proposed
      completion date, due to the amount of time required to establish a target cost for the
      project. As a result, Coliban decided to use its engineering consultant to design the
      project, and to separately tender for the pipe supply and construction works.

      This strategy had a number of advantages:
      •    it allowed the construction of the pipeline to be tendered at the same time the
           pipeline was being designed
      •    it separated the project design, construction of the pipeline and purchase of
           materials, enabled Coliban to submit planning application approvals without
           having to wait until a construction contractor was engaged, and enabled Coliban
           to purchase the required materials well in advance of the construction contractors
           needs
      •    it provided access to a greater resource pool by enabling smaller contractors,
           who were not capable of meeting Coliban’s requirements for a large design,
           supply and construct contract, to tender.

      In developing its procurement approach, the project team considered the present work
      loads and capacity constraints faced by tenderers. This was important due to the
      significant involvement of pipe suppliers and contractors in other pipeline projects at
      the time the project was tendered.


4.1.2 Contract management plan
      Coliban’s Project Management Manual requires the preparation of a Contract
      Management Plan for contracts over $75 000 in value and more than three months in
      duration. The manual requires the following information to be included in the plan:
      •    a work program
      •    an outline of the project reporting processes
      •    inspections of work undertaken
      •    auditing of the contractor’s management system (if required)


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                     •     details of the contractual, occupational health and safety and environmental
                           management issues relating to the project.

                     While a Contract Management Plan was not created for the Bendigo pipeline, most of
                     these elements were included in other documents created for the project or in general
                     procedures developed for the management of Coliban projects.


          4.1.3 Establishing a probity framework
                     Due to the number of tenders conducted by Coliban, it has established a generic
                     probity plan for its major procurements (over $100 000). The plan covers the following
                     aspects of procurement probity:
                     •     probity principles
                     •     role and responsibilities of the probity auditor
                     •     probity tasks and steps
                     •     conflicts of interest
                     •     information management, including security and confidentiality of information
                     •     communication with tenderers
                     •     guidelines to assist its staff to manage probity issues
                     •     record keeping.

                     The plan includes a checklist of 40 probity requirements. The plan provides for the
                     project team or an external party to sign and date each requirement to certify Coliban’s
                     compliance with the plan. Completion of the checklist provides a useful control to
                     ensure all probity requirements have been met.

                     Coliban did not prepare a specific probity plan for the procurement. Nor did it complete
                     the checklist included in the generic plan. Nonetheless, audit established that most of
                     the requirements outlined in the generic probity plan were adhered to by Coliban.


                     Role of the probity auditor
                     In a major tender the role of the probity adviser is to establish and manage the probity
                     approach and advise the tendering authority on probity issues. The role of the probity
                     auditor is to independently review and provide assurance on the probity of the tender
                     process.

                     In Coliban’s procurement process for the Bendigo pipeline, the roles of the probity
                     adviser and probity auditor were performed by the same organisation. While combining
                     the roles may benefit the tendering authority through cost savings and efficiencies,
                     having a separate probity auditor role provides a higher level of assurance about the
                     integrity of the tender process. Combining the roles serves to confuse accountabilities.
                     Audit acknowledges that although this was not a requirement it is considered good
                     practice to divide the probity auditor and adviser roles.




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4.1.4 The procurement process
      Separate tenders were conducted for the supply of materials, project services and
      construction of the pipeline.


      Tender for services agreement
      A public tender was advertised on 4 and 7 October 2006 to engage two contractors on
      a services agreement. The tender required them to:
      •    assist Coliban’s engineering consultant to finalise the detailed design of the
           pipeline
      •    attend a number of value engineering workshops
      •    prepare detailed construction programs, executions plan and industrial relations
           strategies
      •    prepare a fixed price tender for the pipeline construction contract.

      The tender closed on 24 October 2006 with Coliban receiving ten tenders from pipeline
      construction contractors. These contractors were then assessed by the evaluation
      team against the predetermined selection criteria. From this process five tenders were
      then short-listed with one of these short-listed tenderers subsequently withdrawing its
      tender.

      Interviews and a further tender evaluation were then undertaken on the four
      short-listed tenderers. From this process, two construction companies were awarded
      the services agreement contracts.


      Tender for pipe materials
      Coliban advertised its pipe supply tender in both national and local press on 30 August
      and 2 September 2006. Contractors responding to the advertisement were provided
      with the tender documentation and a ‘notification to tenderers’ was issued on
      7 September 2006.

      When tenders closed on 12 September 2006, three tenders were received. Following a
      detailed tender assessment, the preferred tenderer was selected. This tender:
      •     met the tender specifications
      •     had the highest overall rating for demonstrated satisfaction of the tender
            assessment criteria
      •     quoted the lowest cost for the project.

      Following completion of the assessment process, Coliban’s engineering consultant
      held discussions with the preferred tenderer to:
      •    clarify the commercial conditions of the contract and technical aspects of its bid,
      •    request additional information on the tenderers recent project experience and
           cash flows
      •    obtain a detailed program.

      These meetings were attended by the Probity Auditor.



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                     The contract was awarded on 17 October 2006. The same process was followed for
                     each of the other supply contracts.


                     Tender for pipeline construction
                     On 14 November 2006, the two contractors engaged under the project services
                     agreement were asked to tender for the pipeline construction. Tenders closed on
                     13 December 2006.

                     Prior to submitting their tenders, the two companies engaged under the services
                     agreement were required to attend a number of joint and separate project information
                     sessions. These sessions, which were attended by Coliban’s engineering consultant
                     and Coliban staff, were held to clarify the project requirements and proposed
                     construction process.

                     Both firms submitted a tender and these tenders were assessed by the evaluation
                     team against the selection criteria. Assessments of the tenders were carried out by the
                     engineering consultant in conjunction with the Coliban project team in accordance with
                     the approved evaluation criteria and the Association of Consulting Engineers Australia
                     guidelines.

                     As both companies were assessed as capable of meeting the tender requirements, the
                     selection of the preferred tender effectively came down to price. The approved
                     tenderer was engaged on 20 December 2006.


          4.1.5 Managing changes to the tender process and
                requirements
                     Following the awarding of the construction contract, construction of the pipeline began
                     in January 2007.

                     On 7 March 2007 the contractor indicated to Coliban that:
                     •    the adversarial nature of the contractual arrangements and the manner in which
                          Coliban’s engineering consultant was managing the project was delaying the
                          project
                     •    continuing with these arrangements would result in the project failing to meet its
                          completion date
                     •    there was little incentive for it to deliver the project within the tight timeframes
                          required by the contract.

                     The contractor proposed that these problems could be overcome by terminating the
                     construction contract (lump sum) and entering into an alliance agreement (target cost
                     contract). The contractor’s concerns were discussed with Coliban on 16 March 2007
                     where the contractor offered to use the existing tendered contract price as the basis for
                     establishing a target cost for the project.




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The project team identified a number of potential changes to address problems
associated with the existing contractual arrangements. The following options were
considered:
•    staying with the existing contract
•    providing additional funds to the contractor to accelerate the completion of the
     project
•    providing additional funds to the contractor to accelerate the completion of the
     project and offer the contractor an early completion bonus of $1 million
•    moving to an alliance agreement, which included a bonus of $1 million for
     completing the project by 1 September 2007.

The cost, benefits and risks of each of these options were assessed and this
assessment, along with a recommendation to move to an alliance was presented to
the Board on 3 May 2007.

The project team considered the project would not be completed on time if Coliban
continued with the existing contract.

On 30 April 2007 in anticipation of the move to an alliance, Coliban engaged a
consultant to hold a one day workshop for internal and external staff working on the
project to ‘generate aligned leadership and direction for the alliance.’

The Board accepted the recommendation of the project team and determined that:
•    the existing contract with the contractor be terminated
•    the Authority enter into an alliance with the contractor for the construction of the
     pipeline
•    the contractor be paid a $1 million bonus if the project is completed by the due
     date.

Coliban indicated that the new arrangement represented an amendment to the original
contract, as the nature and scope of the works had not changed. In May 2007, four
months into the contract period with the works well advanced, the Authority entered
into an alliance agreement with the contractor.

The alliance arrangement proposed a target cost of $35.2 million, plus a $1 million
bonus if the pipeline was completed by 1 September 2007. This amount was
$6.3 million higher than the contract cost initially established in the tender process.
Figure 4A outlines how the target cost was calculated.

The difference comprised the following four elements:
•    $3.1 million for variations under the original contract, agreed to by the Authority
•    $2.3 million comprising ($1.3 million) acceleration costs and $1 million incentive
     to complete the project by September 2007
•    $1.3 million to cover additional design and other costs
•    $0.4 million risk and opportunity discount.




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                     In assessing alternatives to complete the pipeline by 1 September 2007, Coliban
                     estimated that if it had stayed with the original contract it would have had to pay an
                     additional $6.6 million to complete the project by the due date, comprising:
                     •     $5.3 million, for contract variations and acceleration costs
                     •     $1.3 million for additional design and other costs.

                     Accordingly, the Authority effectively paid $2.3 million above the original contract price
                     to ensure it achieved its objective of completing the pipeline by 1 September 2007.


                                                            Figure 4A
                                                     Calculation of target cost
                                                                                                   Cost
                            Component                                                            $million
                            Original contract cost (Australian Standard contract)                    29.9
                            Variations                                                                3.1
                            Acceleration costs                                                        1.3
                            Additional design and other costs                                         1.3
                            Risk and opportunity discount                                            (0.4)
                            Target cost                                                              35.2
                            Incentive                                                                 1.0
                            Total                                                                    36.2
                            Source: Coliban Water.


                     While project alliances can provide significant benefits, there are also issues and risks
                     associated with this form of procurement. Establishing an effective project alliance
                     involves a number of processes:
                     •     assessing whether an alliance is the best method of procuring the required
                           products and services
                     •     establishing an alliance framework
                     •     selecting an alliance partner
                     •     determining the project target cost, risk and benefit sharing arrangements.

                     The Department of Treasury and Finance’s (DTF) Project Alliancing Practitioners’
                     Guide April 2006 provides guidance to public agencies on the use of alliances. The
                     guidelines indicate that project alliancing should generally only be considered in the
                     delivery of complex, high risk infrastructure projects, where risks are unpredictable and
                     best managed collectively. Situations where an alliance would be suitable include
                     where there are:
                     •     numerous complex and/or unpredictable risks
                     •     complex stakeholder issues
                     •     complex external threats or opportunities, that can only be managed collectively
                     •     very tight timelines (driven by project risk rather than organisational capability)
                     •     output specifications which cannot be clearly defined upfront.




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      Construction of new, and replacement of old, water pipelines is an activity regularly
      undertaken by water authorities. Compared with many other projects, the processes
      involved were not complex, and the specifications were relatively easy to define.

      During the development of the business case and the procurement strategy, Coliban,
      did consider an alliance approach, however, due to the time required to negotiate a
      target cost, the alliance was not considered further. A detailed assessment of whether
      the project was suitable for an alliance was not undertaken.

      Consequently, Coliban moved to an alliance agreement, without first:
      •   establishing an alliance framework
      •   conducting a process to select an alliance partner (this is a distinctly different
          process than used to select a contractor under a standard contractual
          arrangement)
      •   undertaking the tailored process recommended in the Department of Treasury
          and Finance’s guidelines to determine the project target cost, risk and benefit
          sharing arrangements.

      The alliance agreement contained the key features outlined in the guidelines, except
      for:
      •    a specific ‘no partnership/joint venture’ clause
      •    drafting the contract in the third person.

      Coliban’s conversion of a standard procurement contract into an alliance agreement
      exposed the agency to higher risk and costs because:
      •    the assessment of alliance partners involves a distinctly different process and
           focus from the assessment of providers under standard procurement contracts
      •    moving to an alliance agreement without the potential competitive tension from
           other bidders heightens the prospect of diminished value for money, in terms of
           price and risk allocation.


4.1.6 Probity
      Communicating with tenderers
      Coliban’s generic probity plan outlined the communications protocols to be followed by
      staff when communicating with tenderers. It required the Steering Committee to
      establish internal processes to control and monitor communications.

      During the procurement process, Coliban had a number of different interactions with
      tenderers, including information sessions and clarification and negotiation meetings.
      During the meetings, Coliban followed its communications protocols.




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                     Tender for project services agreement
                     For the project services agreement, interviews were conducted with the four
                     short-listed tenderers. A list of key questions were established prior to the meeting. The
                     names of the participants were recorded by Coliban’s engineering consultant in the
                     meeting minutes and the duration of the interviews were approximately the same.

                     Interviews were attended by the consultant, Coliban staff and Coliban’s commercial
                     adviser. The meetings were not attended by the probity auditor.

                     Tender for pipe supply
                     The engineering consultant interviewed the preferred tenderer for the pipe supply
                     contract. A list of questions was prepared prior to this meeting, which focused on
                     clarifying the commercial conditions of the contract and technical aspects of its tender.
                     The consultant also requested a detailed work program and additional information on
                     the company’s recent project experience and cash flows.

                     The names of those who attended the meeting were recorded in the meeting minutes
                     and a summary of the discussion was provided in the tender report.

                     Neither Coliban staff nor the probity auditor attended this meeting.

                     Tender for pipeline construction
                     Prior to submitting their tenders, the two short-listed tenderers attended a number of
                     joint and separate project information sessions. These sessions contained no
                     individual commercial benefit to the tenderers.

                     The sessions were attended by Coliban staff and its engineering consultant. Minutes
                     were taken and the names of attendees recorded. A tender report was sent to the
                     Steering Committee outlining this process.

                     Documenting communications
                     The probity plan outlined requirements for the documentation of communications with
                     tenderers. Coliban documented its communications with tenderers in meeting minutes.
                     In some cases these minutes were included in the tender reports.

                     Independent monitoring of communications
                     The probity auditor was present at the closing of the tenders, but did not attend
                     meetings, briefings, and interviews or review the correspondence between tenderers
                     and Coliban.




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4.2   Conclusion
      The Bendigo section of the pipeline procurement processes was generally well
      planned and managed. Coliban:
      •    developed procurement strategies to meet the tight timeframes, using the
           information gained from discussions with prospective tenderers and advice from
           consultants
      •    identified and assessed risks associated with the tender
      •    established appropriate procurement processes.

      Coliban’s conversion of a standard procurement contract into an alliance agreement
      exposed the agency to higher risk and costs because:
      •    the assessment of alliance partners involves a materially different process and
           focus from the assessment of providers under standard procurement contracts
      •    moving to an alliance agreement without the competitive tension from other
           bidders heightens the prospect of diminished value for money, in terms of price
           and risk allocation.

      As a result of the reduced risk to the contractor in alliance agreements, contractors are
      normally willing to accept a lower price for a target cost contract than a lump sum
      contract. Coliban’s decision to enter into an alliance agreement with the contractor who
      had been selected through a standard tender, combined with its need to have the
      project completed by 1 September 2007, weakened its bargaining position.
      Consequently, Coliban is likely to have paid more for the contracted works than it
      would have paid, had the alliance agreement been formed as part of a normal alliance
      process.

      Due to time constraints, Coliban did not develop a contract management plan or a
      probity plan for the procurement. These plans were required by its internal procedures.
      Although the key elements of these plans were prepared in other documentation,
      better practice would have seen Coliban develop these dedicated plans. In this
      instance, there is no indication that the absence of the plans undermined the integrity
      of the procurement.

      Coliban’s probity auditor did not attend all meetings with tenderers. Accordingly the
      Authority cannot be assured as to the overall integrity of the process.


      Recommendations
      4.1 For major procurements water authorities should prepare a contract management
          plan and probity plan
      4.2 The Department of Treasury and Finance should incorporate into its investment
          management guidance materials, clear articulation that public sector agencies
          should:




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                           •   only enter into alliance procurement arrangements after assessing the
                               appropriateness of these arrangements for the particular procurement
                               exercise and assessing the suitability of an alliance partner, using the
                               Department of Treasury and Finance’s alliancing guidelines
                           •   not tender for lump-sum contracts and then change the arrangements to
                               alliance contracts.


          4.3        Ballarat
          4.3.1 Selecting the procurement approach
                     In developing its procurement strategy, Central Highlands considered and assessed
                     several alternative contractual arrangements for the construction of the pipeline. These
                     alternative arrangements are outlined in Figure 4B.
                                                        Figure 4B
                                Alternatives considered for the construction of the pipeline
                    Contractual
                    arrangement                 Central Highlands’ evaluation of the arrangement
                    Private/Public              Procurement as a PPP under a Partnerships Victoria model was
                    Partnership (PPP)           not considered appropriate for the following reasons:
                                                • a PPP would have provided limited value, as Central
                                                    Highlands had the core knowledge and skills required to
                                                    construct and operate a water pipeline
                                                • neither the construction nor the operation of the pipeline
                                                    involved a level of complexity or scale that would warrant, or
                                                    benefit from, the participation of a private sector constructor
                                                    and operator
                                                • involvement of the private sector through a PPP was unlikely
                                                    to deliver enhanced value for money through risk transfer or
                                                    innovation nor was there any potential for asset use beyond
                                                    what Central Highlands could provide
                                                • the State and Commonwealth Governments had committed a
                                                    large component of the funding required for the project and
                                                    there was no need to access funds through a private sector
                                                    participant.
                    Design of the pipeline by   This alternative was not considered appropriate due to the tight
                    Central Highlands and       project timeline.
                    tender for the pipeline     Under this approach the tender could not have been put to the
                    construction                market until the design was at least 85 per cent complete, which
                                                was unlikely to have occurred until March/April 2007.
                                                Once put to the market the tender response and evaluation
                                                process would take at least two months. This would have
                                                prevented the commencement of pipeline construction until at
                                                least June/July 2007.
                    Design, Build and           Central Highlands decided that there was no benefit to be gained
                    Operate (DBO)               from a private sector operator. Therefore this alternative was not
                                                an option.
                    Design, Build, Finance      Not considered appropriate for the reasons discussed above
                    and Operate (DBFO)          (DBO) and due to funding already being obtained.




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                                    Figure 4B
     Alternatives considered for the construction of the pipeline - continued
Contractual
arrangement                 Central Highlands’ evaluation of the arrangement
Alliance/Partnering         Whilst an alliance/partnering strategy may have provided some
                            benefits to Central Highlands, it would have imposed a significant
                            administrative burden on management and may have increased
                            the overall cost of delivering the project.
                            Central Highlands considered that the key project risks could be
                            effectively addressed through alternative strategies. The
                            additional cost and inherent uncertainties of alliance/partnership
                            procurement were not considered warranted.
Engaging consultants to     This approach was preferred by Central Highlands as:
design the pipeline.        • contractors could be engaged and construction of the pipeline
Tendering for the supply       could begin more quickly than under the other options
of pipes and associated     • cost savings were possible due to Central Highlands not
materials.                     having to engage a head contractor
Tendering for contractors   • it gave Central Highlands greater control over the construction
to construct the pipeline      works to meet the required timelines.
under the management
of Central Highlands and
paid on an agreed
schedule of rates.
 Source: Central Highlands Water


 Central Highlands’ procurement approach guaranteed construction contractors a
 minimum amount of work provided they committed to being available either during the
 entire construction period or an agreed part of the construction period. As contractors
 were allocated works, the relevant scheduled rates were applied or, if different
 scenarios were encountered or predicted, modified rates were agreed. Incentives were
 offered to reward contractors for early delivery of project milestones.

 The approach differed from that normally adopted by Central Highlands for
 infrastructure projects. Under Central Highlands’ normal approach, the contractor
 would procure all the materials and fittings for the job and effectively accept the
 quantity variation risk.

 Central Highlands recognised that its procurement strategy resulted in it accepting the
 project supply risk and the majority of the construction risk. However, it considered that
 the imperative of meeting the projects timelines outweighed the commercial and
 administrative benefits of transferring risk.

 Following feedback from potential suppliers and the Department of Treasury and
 Finance’s Gateway Review of the project, Central Highlands decided to reconsider its
 procurement strategy and subsequently adopted a more traditional approach, which
 involved a lump sum contract with a schedule of rates to manage variation risks from
 nominated quantities.

 Central Highlands’ approach resulted in it accepting the following risks:
 •    additional costs where the pipeline length required was greater than included in
      the contract due to the contractor striking rock or encountering other adverse
      conditions


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                     •     supply of pipes and fittings and creation of stock piles
                     •     securing site access at nominated contractor sites
                     •     planning approvals and significant permits
                     •     agency negotiation (VicTrack, VicRoads, Councils)
                     •     land owner contact and negotiations.

                     On the other hand, this procurement strategy allowed smaller contractors, who would
                     not normally have had the capability to tender for this type of project, to bid for work on
                     the pipeline.

                     In developing procurement approaches, tendering authorities identify procurement
                     risks and allocate these risks to the party best able to manage them. In government
                     infrastructure construction tenders this usually results in:
                     •     the allocation of supply risk to the tenderer (tenderer provides both materials and
                           construction services)
                     •     setting a fixed contract price for the work tendered, through the tender process,
                           which is binding on the authority and contractors.

                     Central Highlands’ decision to purchase pipe directly from pipe manufacturers and the
                     strategy adopted to engage construction contractors, resulted in it accepting the
                     project supply risk and a large part of the construction risk. While this decision was
                     driven by Central Highlands’ need to complete the pipeline as quickly as possible, it
                     exposed the Authority to a higher level of risk than would have been the case had
                     another procurement strategy been adopted. To date, this calculated risk has had no
                     negative financial or other impacts.


          4.3.2 Procurement plan and probity framework
                     While no specific plan for the procurement was prepared, the Central Highlands
                     Tendering and Contract Management Procedures Manual outlined the processes and
                     requirements for the tender process. Most of the information normally found in a
                     procurement plan was contained in the procurement strategy, probity plan and other
                     Central Highlands documents.

                     The probity auditor prepared a probity plan for the procurement, to ensure the integrity
                     of the process, and assist Central Highlands to identify and manage probity issues.
                     The plan outlined the role of the probity adviser and included:
                     •     controls to assist Central Highlands staff to maintain the security and
                           confidentiality of information
                     •     guidance on the management of conflicts of interest
                     •     a communications protocol
                     •     guidance on protecting proprietary information.

                     As with Coliban’s pipeline procurement, the roles of the probity adviser and probity
                     auditor in the Central Highlands procurement process were performed by the same
                     organisation. Audit acknowledges that although this was not a requirement it is
                     considered good practice to separate the probity auditor and adviser roles.


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4.3.3 Managing the tender
      The procurement process
      Central Highlands separately tendered for the pipeline design, pipeline construction
      and purchase of materials.

      Technical services and pipeline design
      On 20 October 2006 four consultants were asked to submit tenders for the project
      management and tender design consultancy.

      When the submissions were evaluated, one consultant was eliminated because it
      lacked Australian experience. Another was eliminated because it was already
      committed to other projects. The preferred consultant was selected for its superior
      financial and technical capability and was appointed on 28 November 2007.

      After completing the evaluation process, Central Highlands offered to reimburse the
      unsuccessful consultants for the costs incurred by them in developing their tenders.
      One consultant accepted this offer.

      Pipeline construction (Northern and Southern)
      The initial tender for the pipeline construction enabled contractors to separately tender
      for the northern, southern or both sections of the pipeline.

      Central Highlands advertised for interested contractors to submit a registration of
      interest for the construction of the pipeline. The 16 contractors submitting registrations
      of interest were initially assessed against the selection criteria. Ten of these
      contractors were interviewed to assess their broad capabilities and to test the market’s
      response to various procurement strategies. These contractors were then provided
      with the tender documents and invited to tender for the construction contract.

      A consultant was also engaged to undertake probity checks on the ten companies
      submitting tenders that were short-listed.

      The seven tenders received were assessed by the evaluation team against the
      evaluation criteria. One tender was eliminated as the price submitted was considered
      by the evaluation team as being excessive.

      The remaining six tenderers received clarification questions prior to meetings with the
      evaluation panel. Following these meetings, tenderers were given an opportunity to
      clarify their tenders prior to the completion of the evaluation process.

      One of the remaining six tenders was eliminated due to an uncompetitive price, an
      underdeveloped tender and non-conformance with tender requirements.




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                     A detailed assessment was undertaken on the remaining five tenders. At the end of
                     this process the evaluation team recommended that the Authority separately tender
                     the north and south sections of the pipeline as:
                     •     it considered that engaging one tenderer to construct the entire pipeline created a
                           risk that the pipeline may not be completed on time
                     •     only one tenderer was considered capable of delivering the entire pipeline in the
                           proposed timeline and the price submitted by this tenderer was uncompetitive
                           when compared to the cost of engaging separate tenders for each section.

                     Following the assessment process, preferred tenders were selected for the northern
                     and southern sections of the pipeline. The tenders selected had the highest overall
                     rating for their section of the pipeline and provided the lowest and second lowest price
                     respectively.

                     The contracts for construction of the northern and southern pipelines were awarded on
                     13 June 2007.

                     The evaluation team had some concern regarding the ability of the preferred tenderer,
                     selected for the southern section of the pipeline to complete the work in the required
                     timeframe. This risk was managed by:
                     •     dividing the contract into two components
                     •     including a contractual clause, that allowed Central Highlands to re-tender part of
                           the contract if the contractor failed to meet the pipe-laying milestone rate set in
                           the contract.

                     Pipeline construction (Central)
                     Central Highlands advised the contractor that it was going to re-tender part of the
                     contracted work, when the contractor could not meet the timelines specified in the
                     contract.

                     On 12 October 2007 six of the contractors submitting tenders for the original
                     construction contract (including the contactor engaged to construct the northern
                     section of the pipeline) were advised that Central Highlands would be calling for
                     tenders. A request for tender was issued to five contractors (one contractor decided not
                     to submit a tender).

                     Following an evaluation of the tenders, one tender was eliminated on price and the
                     remaining four tenders were subject to further assessment and evaluation.

                     While all four tenders received were assessed as capable of undertaking the proposed
                     works, the contract was awarded to the contactor engaged to construct the northern
                     section of the pipeline. This contractor tendered the lowest price and offered more
                     equipment. Engagement of this contractor was also attractive to Central Highlands as
                     it did not have to engage an additional party and the contractor:
                     •      had its equipment on site
                     •      already had an environmental management plan approved by DSE
                     •      understood the stakeholder issues.


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                                                                              Procurement stage




      The contract was awarded on 13 November 2007.

      Supply of pipes
      On 8 November 2007 Central Highlands issued a registration of interest for the supply
      of pipes and fittings. Ten organisations registered their interest.

      After receiving the registrations of interest, companies were evaluated against
      predetermined selection criteria, interviewed and asked a series of standard questions.
      These meetings were used to assess the availability and interest of contractors and to
      allow them to respond to the proposed terms and conditions to be included in the
      construction contract.

      One of the four tenders received was eliminated as it did not submit a conforming
      tender and another eliminated on price. The two short-listed tenders were interviewed
      and further evaluated. Following this process a preferred tender was selected. This
      tender received the highest overall rating and offered the lowest cost. The contractor
      was also assessed as more likely to achieve the project timelines than the other
      contractor.


4.3.4 Managing changes to the tender process and
      requirements
      During its procurement process Central Highlands awarded separate pipe laying
      contracts for the northern and southern sections of the pipeline. This decision was part
      of its broader strategy to construct the pipeline within the required timeline.

      In September 2007, prior to the completion of the contracted work on the southern
      section of the pipeline, the pipe laying contractor informed Central Highlands that the
      firm was unable to meet the critical pipe laying milestones outlined in the contract. The
      contractor agreed to Central Highlands re-tendering a separable portion of the route
      following discussions about its slower rate of progress.

      In these circumstances, the contract allowed Central Highlands to re-tender the
      separable portions of the work.

      The incomplete work on the southern section of the pipeline was successfully
      re-tendered and the contractor constructing the northern section of the pipeline was
      engaged to undertake this work. This was consistent with the conditions included in the
      original contract.




                                                 Piping the System — Goldfields Superpipe   95
Procurement stage




          4.3.5 Probity
                     Managing conflicts of interest
                     At the commencement of the project, the Project Director wrote to all relevant staff and
                     contractors, advising them of the requirements outlined in the probity plan and seeking
                     an assurance that no conflicts of interest existed. Conflict of interest declarations were
                     signed and documented appropriately.

                     Central Highlands identified a conflict of interest for several tenders. This conflict arose
                     because Central Highlands’ engineering consultant, who was assisting with the tender
                     evaluation, was owned by a firm that was likely to tender for the supply of pipes, valves
                     and other materials.

                     Central Highlands engaged another engineering consultant to replace its original
                     consultant.

                     The probity auditor provided assurance that the change had not damaged the integrity
                     of the tender process.


          4.3.6 Independent oversight of communications
                     While the probity auditor was aware of all meetings held with tenderers, the probity
                     auditor did not attend all of these meetings and did not monitor all communications
                     with tenderers. Accordingly the Authority cannot be assured that sensitive tender
                     information has been controlled and that tenderers have been treated consistently and
                     fairly.



          4.4        Conclusion
                     The Ballarat pipeline procurement processes were generally well planned and
                     managed. Central Highlands:
                     •    developed procurement strategies to meet the tight timeframes, using the
                          information gained from discussions with prospective tenderers and advice from
                          consultants
                     •    identified and assessed risks associated with the tender
                     •    established appropriate procurement processes.

                     Central Highlands’ probity auditor did not attend all meetings with tenderers.
                     Accordingly the Authority cannot be assured as to the overall integrity of the process.


                     Recommendation
                     4.3   For major procurements water authorities should expand the role of the probity
                           auditor so all meetings and communications with tenderers are monitored.




96        Piping the System — Goldfields Superpipe

								
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